Continued Growth, More Mergers Expected in 2013

Following a year of with several mergers and consolidations in the seniors housing industry, experts agree that the rate-of-return success of the industry’s REITs will continue to push investors into to the sector, and could result in more portfolio deals in 2013.

Headlines going into 2013 will likely remain focused on the biggest deal of 2012, the $845 million purchase of Sunrise Senior Living by Toledo, Ohio-based Health Care REIT Inc. However, there is still more merger movement brewing, as pricing, occupancy and performance improve due to the lack of new development.

Mindy Berman, managing director of capital markets for Jones Lang LaSalle, says it’s likely in 2013 that the big three health care REITs—HCP Inc., Health Care REIT or Ventas Inc.—will buy up one, two or even three of the public seniors housing companies. She also says newer trusts such as Chicago-based Aviv REIT Inc., which this month filed a registration statement relating to its initial public offering, are going through growth modes that allows for more creative movement in the industry.

“The rumor mill is rife with targets such as Brookdale Senior Living, as well as for some of the skilled nursing facilities. You have companies such as Fortress likely to monetize some of their investments, and pricing is just improving for sellers, everyone believes this sector is going to continue to perform,” she says. “The health care REITs are expected to continue acquisitions, having the lowest cash to capital, likely able to not only buy real estate assets but the operating businesses as well.”

Deutsche Bank Markets Research analyst Darren Lehrich caused a stir last month when he reported about the possibility of Nashville, Tenn.-based Brookdale Senior Living converting to a REIT, in part because of Fortress Investment Group’s encouragement of Penn National Gaming Inc.’s REIT conversion. Fortress, a significant stockholder in Penn, also owns about 15 percent of Brookdale, a company that could also benefit from splitting off its holdings into a trust, Lehrich says.

Lehrich claims he based his theory in part from a presentation by Mark Ohlendorf, co-president and CFO of Brookdale, at the Stephens Fall Investment Conference in November. At the conference, Ohlendorf talked openly about the benefits of converting the company, which holds and manages about 67,000 seniors housing units. The firm is also currently seeking a new leader, as current CEO Bill Sheriff plans to retire.

Ohlendorf said at the conference that one of the best ways for a seniors housing firm today to chase yield is to form a trust. “There are a number of different options that we have been exploring and continue to explore,” he says. “We could monetize value in some way with an existing REIT, and we have three very large successful REITs in our world. They could buy our assets, they could buy our company. The practical consequence is that we could spit into an operational company and a property company.” Officials at Brookdale declined to comment for this story.

Charles Harry Jr., director of research and analysis at the National Investment Center, says his organization is predicting occupancy to hit almost 90 percent by the end of 2013. The seniors housing industry is recovering slowly, at about 20 basis points per quarter, but that steady growth is better than other commercial real estate sectors. “The investment return results show how strong the industry is compared to core properties, and over time, as we encounter even stronger demographic interest, more investors will feel obligated to participate in the sector,” he says.